Portrait of The Big Dipper
Ilargi: It is a profoundly sad time at The Automatic Earth. Stoneleigh’s little sister Gwen, Mother Mary bless her soul, passed away last night in Ottawa. She leaves two young children behind.
Thank you for all the kind words of support, they're much appreciated. Stoneleigh still has insisted on doing her talk tonight, Wednesday September 22, in Madison, Wisconsin. Please be gentle with her.
Another kind of sadness, albeit of course at a different level and of a different degree altogether, must have come over many people, though most may not even have noticed, when the FBER a few days ago declared the recession was over in June 2009.
Look, it doesn't matter what sort of accounting is used here, and it doesn't matter what other justifications (rising stock markets, bank profits [sic]) are offered for a statement such as that. It's just wrong. It’s wrong because since June 2009, unemployment numbers have continued to shoot up, especially long term numbers, and millions of Americans have lost their homes.
When 77% of your population lives paycheck to paycheck, as David DeGraw writes, up from 43% when the recession started in 2007 and 61% when it supposedly ended, it's high time to consider dignity and respect when publishing cold statistics. How good of a thing is it for a president to tout his achievements in front of TV cameras while fast increasing numbers of those who voted him into office see no way out of their misery anymore, when for many the recession's just started instead of ended? Who does a president represent, exactly?
Just like the GDP is a perverse standard of "wellness" as long as people suffering in hospitals from long term ailments, and those who get severely injured or die in traffic accidents, count as positive contributions to that standard, the NBER’s definition of recessions isn’t just one of those 1300 in a dozen lies politicians love to tell in order to win votes. It’s a bright red flashlight warning of deep rooted cynicism. The fact that nobody's watching it, or recognizing it for what it is, makes no difference. A mentally healthy society would simply and bluntly refuse to accept these cynical offerings handed down from above.
Still wondering why the tea parties are so popular? It's easy. They’re cynicism cubed. They give people what they’ve become used to, only much more so.
Special White House economic adviser Larry Summers will leave and return to Harvard. Yes, granted, that may well be the most cynical one of them all. First off, Harvard shouldn’t want him back. He proved himself to be a sexist pig while there, and moreover provided investment advice that cost the institution tens of billions of dollars. Second, Summers was at the Treasury under Clinton and as such instrumental in repealing Glass-Steagall, kicking out Brooksley Born (once a sexist pig, ...) and making sure there would be no limits on the new “creative” financial instruments the banking sector was busy unleashing on the country’s financial system.
Now Larry’s helped the US economy miles further down into the gutter, and he gets to leave just like that? Let’s give him a medal, why don’t we? Chief of Staff Rahm Emanuel will go his way as well, to further collapse the city of Chicago. My money would be on Tim Geithner bailing out also, for a nice banking job. Morgan Stanley? Goldman would raise too many questions. It’s all more cynicism, power horny middle aged men dropping their pants to moon the American people, leaning out of the windows of their limos, humming along to MC Hammer’s “Can’t touch this".
Whoever replaces this cast of clowns, the damage has long been done. And a president who decides to tackle a plunging economy with the same guys who made it plunge in the first place shouldn’t in an ideal world get away with merely easing them out halfway through his term. That can’t be where the buck stops, not in a properly functioning society. Such a president should admit his failures and leave too. That would be dignified, respectful of the people.
It's not going to happen, men of principles are nowhere to be found in Washington anymore, and if they would pop up, they'd be found sleeping with the fishes in the Potomac tomorrow morning.
America's major economic activity and goal today is to bring down the dollar in the world markets. Everyone's yelling about record gold prices, but that's just in dollars, and therefore means nothing. Gold was higher a week ago in euros than it is today. German Chancellor Angela Merkel is biding her time until Japan, the US, Switzerland, Brazil et al are done dumping their currencies. She’s buying relatively cheap oil and some other stuff in the meantime. But a euro at $1,34 will not last long, it hurts German and Dutch exports too much. The currency war to the bottom has only just begun.
And America can’t win this one, in an ironic twist on the same reason it hasn’t won any war in the past 60 years. Being the reserve currency does that to you.
Life's good on the way up, certainly when you are the reserve currency. That’s why Obama, the NBER and all those other parties with prime access to the media wish to make you believe there still is a way up, even that we're on it as we speak. Because life on the way down isn't all that great when you’re the reserve currency. Or the president for that matter. Everyone else can buy the US dollar now simply in order to bring their own currency down, and get something tangible in return.
And a 9.6% unemployment rate, or 16.7% in more realistic terms, does not spell an end to a recession. If anything, it spells an end to an experiment started in 1776, of a new world built on freedom, truth, dignity and respect. There's not much left, other than a lot of decent people too busy and too blinded to notice they're being robbed blind as they watch 57 channels with nothing on. Cynicism rules all over the place. And you can't build anything that way.
Bon voyage, sweet Gwen.
Census Bureau Poverty Rate Drastically Undercounts Severity of Poverty in America
by David DeGraw, AmpedStatus Report
While the shocking new poverty statistics from the Census Bureau indicating that a record 43.6 million Americans lived in poverty in 2009 emphatically demonstrates the severity of the economic crisis, the Census is drastically undercounting this demographic. Apparently government poverty statistics are as accurate as their unemployment statistics.
I have read many reports that simply restate what the government has said without questioning the fact that the metrics they use to calculate poverty are extremely outdated.
News reports are out saying that in 2009 the poverty rate “skyrocketed” to 43.6 million - up from 39.8 million in 2008, which is the largest year-to-year increase, and the highest number since statistics have been recorded - putting the poverty rate for 2009 at 14.3 percent. This is obviously a tragedy and horrific news. However, this is blatant propaganda.
Let’s revisit the 2008 Census total stating that 39.8 million Americans lived in poverty. It turns out that the National Academy of Science did its own study and found that 47.4 million Americans actually lived in poverty in 2008. The Census missed 7.6 million Americans living in poverty that year.
How did that happen? The Census Bureau uses a long outdated method to calculate the poverty rate. The Census is measuring poverty based on costs of living metrics established back in 1955 - 55 years ago! They ignore many key factors, such as the increased costs of medical care, child care, education, transportation, and many other basic costs of living. They also don’t factor geographically-based costs of living. For example, try finding a place to live in New York that costs the same as a place in Florida.
So the Census poverty rate increase of 3.8 million people will put the 2009 National Academy of Science (NAS) number at a minimum of 51.2 million Americans. And if the margin of discrepancy is equivalent to the 7.6 million of 2008, we are looking at a NAS number of at least 52 million people for 2009.
Let’s also consider the fact that more than 20 million people were on unemployment benefits last year. A Center on Budget and Policy Priorities analysis concluded that unemployment insurance temporarily kept 3.3 million people out of poverty. Food stamp assistance kept another 2.3 million people out of poverty. On top of that, an additional 2.3 million people in prison were not counted in the poverty rate. Add up these numbers and we are looking at 60 million Americans living in poverty. Which means the government number glosses over 16.4 million Americans in poverty.
Now let’s look at the poverty line that these numbers are based on: $22,050 for a family of four. Let me repeat that: $22,050 for a family of four. That breaks down to $5513 per person, per year. I don’t know about you, but I can’t imagine living in the United States on $459 per month. That amount will barely get you a good health insurance policy, never mind food, clothes and a roof over your head. No wonder why a record 50.7 million Americans do not have health insurance. (Beware: 50.7 million Americans without health insurance is a government-based number. If you had health insurance for only one day last year, you are not counted in this total.)
Clearly, the Census is setting the income level for their poverty measurement extremely low, and if you increase that measure by just a small increment, to $25,000 for a family of four, you are now looking at nearly 100 million Americans in poverty.
Let’s also consider the staggering amount of Americans - 52 million, roughly 17% of the population - who are currently enrolled in “anti-poverty” programs. Over 50 million are on Medicaid, 41 million are on food stamps, 10 million are on unemployment, 4.4 million receive welfare. Not counted in this “anti-poverty” total are 30 million children enrolled in the National School Lunch Program. Another metric: if it wasn’t for Social Security - note to deficit hawks - 20 million more would be added to the poverty total.
The effect of people moving in with family members instead of living on their own has further masked the severity of the poverty crisis. Foreclosures, unemployment, increased cost of education and health insurance have led the average household to grow in size. As Patrick Martin reports:“The number of multifamily households increased by 11.6 percent from 2008 to 2010, and the proportion of adults 25-34 living with their parents rose from 12.7 percent in 2008 to 13.4 percent in 2010. The poverty rate for these young adults was 8.5 percent when they were considered part of their parents’ household, but would have been 43 percent if they had been living on their own.”
This trend is currently increasing. Although it is terribly under-reported, foreclosure rates continue to rise. We just experienced the worst month of foreclosures in history; the generation just graduating from college is carrying record levels of student-loan debt, and they are being forced into much lower income levels than anticipated, if they can even find employment.
Another glaring factor clouding our view of poverty in America is that the Census does not calculate a person’s assets and liabilities. Considering the massive debts most Americans are carrying, this would make the poverty rate explode. Stephen Crawford and Shawn Fremstad from Reuters concisely summed up this point:“As Nobel laureates Joseph Stiglitz and Amartya Sen, along with economist Jean-Paul Fitoussi, write in their new book Mis-measuring Our Lives, ‘Income and consumption are crucial for assessing living standards, but in the end they can only be gauged in conjunction with information on wealth.’ This point is just as relevant to poverty measurement as it is to other measures of living standards.
To understand why this is the case, consider two families: one had an income that puts them a few thousand dollars below the poverty line, which was $22,050 for a family of four in 2009; the other has an income a few thousand dollars above the line. Looking only at income, the first family is worse off than the second.
Now add what the family owns and owes into the mix. Let’s say the first family has substantial net equity in its home and moderate liquid savings for a ‘rainy day,’ while the latter has no liquid savings or, as is becoming too common these days, has liabilities that dwarf their assets such as an ‘underwater’ mortgage. Using this more comprehensive method, the latter family, despite a modestly higher income, is actually the poorer one.”
In my analysis, a key metric to judge the overall economic security and hardship level of a country is the percentage of the population living paycheck to paycheck. Anyone who lives paycheck to paycheck can tell you about the stress and psychological impact it has on you when you know your family is one sickness, injury or downsizing away from economic ruin. The employment company CareerBuilder, in partnership with Harris Interactive, conducts an annual survey to determine the percentage of Americans currently living paycheck to paycheck. In 2007, 43 percent fell into this category. In 2008, the number increased to 49 percent. In 2009, the number skyrocketed up to 61 percent.
In their most recent survey, this number exploded to a mind-shattering 77 percent. Yes, 77 percent of Americans are now living paycheck to paycheck. This means in our nation of 310 million citizens, 239 million Americans are one setback away from economic ruin.
So when I hear the government and media tell me that 43.6 million Americans lived in poverty in 2009, while that is horrifying enough, I get extraordinarily frustrated knowing that even that sad statistic is putting a major positive spin on this economic disaster that is still far from over. While the economic top half of one percent now fears a “double-dip,” the overwhelming majority of Americans are still in the same downward spiral they’ve been on.
For one last missing piece to this equation, corporate profits are soaring while all this is devastation is occurring. Despite this economic crisis, it’s not like our country doesn’t have the money. A recent study done by Capgemini and Merrill Lynch Wealth Management found that a mere one percent of Americans are hoarding $13 TRILLION in “investible wealth.” Yep, one percent of Americans are hoarding $13 TRILLION in “investible wealth,” and that doesn’t even factor in all the money they have hidden in offshore accounts.
As famed American philosopher John Dewey once said, “There is no such thing as the liberty or effective power of an individual, group, or class, except in relation to the liberties, the effective powers, of other individuals, groups or classes.”
The United States now has the highest inequality of wealth in our nation’s history. Tens of millions of Americans are stressing out wondering how they are going to keep their bills paid, and the people who caused this crisis are rolling around in $13 TRILLION. The Robber Barons have been displaced as America’s most despotic and depraved ruling class.
Sing it with me:
God shed his grace on thee,
And crown thy good with brotherhood
From sea to… shining sea! …
God mend thine ev’ry flaw,
Confirm thy soul in self-control,
Thy liberty in law! …”
Psst… WAKE UP. The American Dream is over. While you were sleeping we got robbed!
The Stagnating Labor Market, 1: Dropping Out Of The Labor Force
by Mike Konczal - New Deal 2.0
Arjun Jayadev and I have another working paper out of Roosevelt Institute, this time focusing on the labor market in the current recession. The paper is: The Stagnating Labor Market (pdf). I hope you check it out; I’m going to talk about the main things we found in two posts.
Dropping Out of The Labor Force
This is what the labor market loops like. It is normally a dynamic machine where people transition between employed, unemployed, and out of the labor force. But recently sand has been thrown in the gears, and people’s transitioning between these states is slowing, with more and more people ending up in not in the labor force and staying there.
It’s a little complicated, so let me explain. This is the percent of unemployment who leave unemployment every month and where they go. In normal times, you’ll see 25%+ of unemployed transition to employed. This is robust to several ways of calculating this number. This high number is the result of, and a justification for, our comparatively weak social safety net for the unemployed.
But notice what has happened in this recession: Starting in January 2009 it is more likely an unemployed person will drop out of the labor force instead of finding a job.
More people are leaving unemployment by simply leaving the formal labor force rather than ending up with a new job. This has massive implications for how we all should view the unemployment numbers.
And notice that the sudden new normal of unemployed leaving the labor force instead of finding a job has been buffered by a sharp drop in the number of people leaving the labor force; this is no doubt in large part to the extension of unemployment insurance, which has incentivized people to continue looking for a job instead of leaving the formal economy.
To see if this is a new historical development, we use the data constructed by Robert Shimer’s and available on his webpage (with an update from Shimer that goes to Q1 2010). The data from June 1967 and December 1975 were tabulated by Joe Ritter and made available by Hoyt Bleakley on Shimer’s webpage. Here is both the outflows from unemployment and a separate chart that graphs the difference between the two (as with all graphs, click through for larger image):
Going back to 1967 this simply hasn’t happened consistently before. (Certainly not at all before the weak recovery of the Bush years.) This is a brand new feature to this recession, and as such policy and research needs to be mustered to better identify this grouping of individuals and reintegrate them back into the labor force after the recession is over.
For our evidence shows the ability to find a job from outside of the labor force, normally a fairly reasonable thing to do, has collapsed:
The blue line is the monthly likelihood of going from outside the labor force to employed, which has slowed down. This transition is very evident of populations like the young, whose unemployment rate is skyrocketing.
While the out of the labor force population increases:
With massive human capital depreciation for those who find themselves outside of the labor market and a possible hysteresis in unemployment for all of us, where high unemployment generates a higher NAIRU, this is a problem of massive proportion that isn’t captured in normal statistics or in our normal policy discussions.
QE2 in round trillions
by Ambrose Evans-Pritchard - Telegraph
Here is a back-of-an-envelope guess by David Greenlaw at Morgan Stanley on what the Fed can expect from a second blitz of bond purchases, or `Shock & Awe’ as he calls it.
If Ben Bernanke does a further $2 trillion (on top of the $1.7 trillion already in the bag) the yield on 10-year US Treasuries will drop 50 basis points to around 2.2pc.
GDP growth will be 0.3pc higher than otherwise in 2011 and 0.4pc higher in 2012.
The unemployment rate will be 0.3pc lower in 2011 and 0.5pc lower in 2012 — (in other words drop from 9.6pc to 9.1pc, ceteris paribus).
That looks like trivial returns for a collosal adventure into the unknown, with risks of dollar flight and mounting Chinese suspicions that the US intends to default on its external debts by debasement.
I had dinner recently with a former Goldman Sachs hedge fund guru, and while I can’t remember the exact details through a fog of Mersault Premier Cru, I am pretty sure he said it would take $30 trillion to do the job – given the scale of wealth destruction from the US property crash and ferocity of debt deleveraging still to come.
We will find out tomorrow whether Fed hawks from such districts as Dallas, Richmond, Kansas, and Philadelphia are really willing to sign off so soon on the next helicopter drop. It seems very strange that they should do so when the official line is that there will be no economic double-dip, and that this Summer’s slowdown is just a mid-cycle correction.
Bernanke said at Jackson Hole that the Fed would hit the button “if the outlook were to deteriorate significantly”. Has that standard been met? I happen to think that the underlying conditions have been buckling for months – if you look at forward-looking indicators rather than backward-looking indicators (the internals of the ISM for example) – and that the economy is slowing to stall speed as the inventory boost wears off, housing support is snatched away, and fiscal tightening bites.
BUT THAT IS NOT THE FED’S STATED VIEW. If it were to sign off on fresh QE as cavalierly as some analysts seem to suppose, it would invite ridicule. Such action would suggest there really is a Bernanke Put, a safety net for asset prices, investors, and the rich.
Whatever Bernanke may think in private – and I am sure that he would dearly like to get ahead of the curve with fresh `credit easing’ [his term] to limit the tail-risk of deflation – he cannot even command the unity of the Fed Board in Washington. Kevin Warsh seems to share much of the scepticism of the hawks.
On another note: here is a chart from the Morgan Stanley Strategy Forum on the main tradable currencies:
It speaks for itself. Sterling is the most undervalued. The Aussie and Kiwi are the most stretched. No wonder Goldman Sachs is advising clients to go long sterling/short kiwi as one of their top trades.
There again, mean reversion always looks deliciously simple but never quite works the way you think.
Bob Prechter: My Charts Say DOW May Plummet To 2,000
by Henry Blodget - Tech Ticker
An ominous pattern forming in the stock market may be telling us the DOW is about to plummet to 2000-3000, says Robert R Prechter, Jr. Prechter, who writes a market letter for Elliott Wave International, is no stranger to apocalyptic forecasts. For the past year or two, he has been steadfast in his prediction that the market is on the verge of a historic collapse.
The timing and depth of this crash has varied--earlier this year, Prechter suggested the DOW might fall to 1,000, and more recently, he said we were looking at the worst bear market in 300 years--but he hasn't wavered in his conviction that we're due for major pullback.
One cause of Prechter's concern is a technical pattern called a "head and shoulders top." Historically, Prechter says, this pattern has often preceded extended bear moves. Prechter thinks the left-hand "shoulder" of this pattern was the market peak in early 2000, the "head" the higher market peak in 2007, and the "right shoulder" the recovery we're enjoying now.
If the pattern is followed by the same pullback Prechter has seen in other eras, Prechter says, the DOW could fall to 2000-3000. Fortunately, Prechter says he is not predicting that kind of crash. He's just warning about an upcoming severe pullback in stocks. And he also sees similar doom in the forecast for high-yield bonds, gold, and other commodities.
Bulls Go to Extremes: Don't Buy the "Breakout", Sell It, Prechter Says
by Aaron Task - Tech Ticker
Stocks jumped Monday with the Dow rising 1.4% to 10,753 and the S&P gaining 1.5% to 1143, its highest close in four months. The S&P eclipsing 1130 for the first time since late June would seem to confirm the long-awaited technical breakout for the index, and could pull many reluctant investors off the sidelines. "Many automatic buy and sell orders are set around market milestones such as these, and investors watch those levels closely for clues about which way the market may go next," the AP reports.
But the wise move now is to sell this recent rally, says Robert Prechter, president of Elliott Wave International. "I think we're getting ready for another leg on the downside," Prechter says, citing evidence of what he says are extreme levels of optimism, including:
- The most-recent AAII poll shows bearish sentiment at 24%, less than at the Dow's peak in October 2007.
- Mutual fund cash positions being at record lows, which Prechter says should be taken at "face value" rather than the result of massive redemptions from equity mutual funds.
- The TRIN Index (a breadth indicator) at one of its lowest levels in recent years, indicating extreme buying pressure of stocks at 52-week highs, i.e. investors chasing momentum/performance.
In addition, Prechter notes volume has been punk during the rally in recent weeks a sign, to him, that buyers lack conviction. The veteran market-watcher says the current environment is similar to the 1930-31 period. "The market can make its high while optimism makes a peak despite the fact you're going stair-step lower," he says. "What we had in May with the ‘flash crash' was the first wave down."
Prechter predicts these periods of downturns sandwiched around 4-5 months of recovery "where people think we've hit the bottom" is likely to "go one for quite a long time" until a true bottom is reached well below the March 2009 lows, much less today's levels.
NBER: Double Dip or Banana Split?
by Rick Davis - Consumer Metrics Institute
We founded the Consumer Metrics Institute precisely because we felt that the economic bureaucrats in Washington were out of touch with the economy that most of us live in. They remind us of those patients sitting in wheelchairs in the "memory impaired" wards at nursing homes: with crystal clear recall of 1937 but no clue about what they ate for breakfast. Thank you, NBER, for making our case.
In contrast, we measure what consumers are actually doing on a daily basis. If, for the sake of argument, we accept that we are not experiencing just "one big scoop," but rather a "double dip" (thereby making the 1930's a "banana split"), we can show evidence that the first dip ended early in 2009. Arguably, we've been monitoring in real-time what could be viewed as two independent consumer demand contraction events that were separated by a stimulus induced "sugar high" last summer. If so, the first dip is ancient history. What is important now is future course of the second dip -- which may just now be revealing itself.
We are far enough "up-stream" in the economic cycle that we can measure changes in consumer demand for discretionary durable goods long before those changes flow "down-stream" to the factories and the GDP. From our up-stream vantage point the "double dip" is not hypothetical, but rather something that we have been watching unfold on a daily basis since January. Now, for the first time, we may have measured what will be the worst of the second dip when it eventually hits the factories -- all because, ironically, our data has started to improve.
Over the 45 days from August 1 to September 15, our Weighted Composite Index has improved substantially, rising from recording a year-over-year contraction rate in excess of 9% to recently registering a contraction rate much nearer to 3%. This is the largest positive movement that we have seen since late 2009. That said, it is important to remember that consumer demand for discretionary durable goods is still contracting, albeit at a slower rate. But the improvement has stopped (at least temporarily) the decline of our 91-day trailing quarter average (our Daily Growth Index):
(Click on chart for fuller resolution)
Our Daily Growth Index reached a -5.86% contraction rate on September 12, which was fully 97% as bad as the worst contraction rate reached during the "Great Recession of 2008" (-6.02% on August 29, 2008). A calendar quarter of comparable GDP growth has occurred among only 1.29% of all quarters of U.S. GDP growth recorded by the Bureau of Economic Analysis of the U.S. Department of Commerce, since the spring of 1947. This corresponds to level of contraction that should be expected only once in 19.4 years, and it comes close on the heels of the 2008 contraction that should occur only once in every 21.4 years.
One of the tools that we have used to monitor the 2010 contraction event is a chart that we call our "Contraction Watch," which overlays graphically the day-by-day progression of the current 2010 contraction onto the "Great Recession of 2008":
(Click on chart for fuller resolution)
In the above chart the two contractions are aligned on the left margin at the first day during each event that our Daily Growth Index went negative, and they progress day-by-day to the right, tracing out the daily rate of contraction. This chart conveys important information about the 2010 event, in particular how it differs in profile from the "Great Recession of 2008." It has now lasted three weeks longer than the "Great Recession" and is perhaps only just now forming a bottom. Furthermore, that bottom is very nearly as low as the one experienced in 2008. Even if the 2010 contraction immediately starts to retrace the recovery pattern seen in 2008, we should expect at least another 120 days or so of net contraction before the consumer portion of the economy is growing once again.
We have previously pointed out that the true severity of any contraction event is the area between the "zero" axis in the above chart and the line being traced out by the daily contraction values. By that measure the "Great Recession of 2008" had a total of 793 percentage-days of contraction, and its severity can be visualized as the amount of area covered by the red stripes in the chart below:
(Click on chart for fuller resolution)
Similarly, the current 2010 contraction has just reached 592 percentage-days, and its severity can be visualized as the amount of area covered by the blue stripes in this chart:
(Click on chart for fuller resolution)
The blue stripes above already cover about 75% of the area covered by the 2008 "Great Recession", and the curve has only just begun to start back up. Looking ahead, should the 2010 event recover from its bottom exactly like the 2008 event did, it would still experience another 466 percentage-days of contraction before ending -- resulting in a grand total of 1058 percentage-days of contraction for the 2010 event, fully 33% more severe than the "Great Recession of 2008." This, of course, assumes that stimuli comparable to those seen in 2008-2009 will be available to cause such a recovery during 2010-2011 -- and that unemployment quickly returns to the levels that helped consumer demand start to rebound in late August of 2008: about 6.1%. Absent fresh consumer stimuli and dropping unemployment rates, the consumer demand contraction we are witnessing could very well linger.
Over the past month and a half we have seen a substantial reduction in the year-over-year contraction of consumer demand. That said, it is important to remember that consumer demand is still contracting, albeit at a slower rate. We have previously used the analogy that our data is far "upstream" in the economy. We are sampling the behavior of internet shopping consumers on a daily basis. Those consumer activities flow "downstream" to factories over the course of weeks or quarters. It's not unlike being upstream on a great river and watching a water-level gauge predict that downstream communities will be flooding catastrophically in a few days or weeks. Although our flood-gage may have just peaked, the downstream damage remains inevitable -- it simply hasn't arrived yet.
Hatred is killing your profits; new meltdown ahead
by Paul B. Farrell - MarketWatch
“During the past decade America went from being an essentially optimistic nation to being an essentially pessimistic one, and finally one that seems to be just plain angry all the time. We are now defined more by what we don’t like rather than what we do like,” says Graydon Carter, Vanity Fair editor.
Result: That mind-set is not only killing Main Street’s investment returns, it’s setting up another catastrophic Wall Street meltdown, dead ahead. "In some ways Herbert Hoover got a bad rap," says David Stockman in an interview with Alan Murray. The former Reagan Administration budget director lays out a plan for economic recovery by cutting spending, raising taxes, and allowing for years of austerity.
“The list of what we don’t like is long and getting longer,” says Carter. “Conservatives define themselves more by their hatred of liberals than anything else and, conversely, liberals by their distaste for conservatives.
“What else don’t we like? Wall Street, Google, and BP for a start. We don’t like pro-abortion nuts or anti-choice nuts. We don’t like pro-mosque-at-Ground-Zero people, or the anti-mosque faction. We don’t like New York or California, Hummer drivers or Prius drivers. We hate Obama, Bush, and Cheney. (We’ve all but given up on Congress.) We hate big media, big oil, big China.”
The psychology of hatred killing the investor’s soul (and retirement)
Hatred defines us, driving us headlong into a fast-paced decade where hatred is feeding on itself … where democracy is dead, capitalism is deader and the “American Dream” deadest … where Wall Street will lose another 20% of our retirement money in the decade ahead … where the majority already believe their kids will do better than their parents … where we’re all trapped in a relentless countdown not just to another catastrophic meltdown coming soon but on to the 2020 decade, a deadly new era predicted by the Pentagon of “desperate, all-out wars over food, water, and energy supplies,” where “warfare will define human life” across the planet.
Yes folks, in 10 short years hatred has transformed America, already blowing a new bubble. Can we stop this death-spiral? “Irrational Exuberance” author Robert Shiller warns that “until we understand and address the psychology that fuels these bubbles, they will keep forming. We recently lived through two epidemics of excessive financial optimism, we are close to a third episode … another meltdown ... another depression.”
Understanding begins by asking: When did this shift into hatred begin? The timing is painfully obvious. No, not the new Tea Party. America’s hatred surfaced a decade ago when we arrogantly labeled an “Axis of Evil,” then went to war under false pretenses. Real bad move: With the unfortunate and unintended consequences of strengthening the “evil” Iran, an enemy that Iraq had been keeping in check.
Paradox of hatred: Undermining our future, strengthening enemies
That historic foreign policy blunder was the beginning of America’s psychology of hatred. This truth encouraged me to reread Ernest Becker’s classic “The Denial of Death,” which I first read shortly after joining Morgan Stanley years ago. In Sam Keen’s introduction, Becker’s message is clear: The fear of dying is so terrifying humans deny their mortality, suppressing it deep in our unconscious.
Then, as part of this mental cover-up we engage in “heroic ventures,” illusions that help us believe that “we transcend death by participating in something of lasting value:” raising families, writing books, doing good deeds, becoming celebrities, or building fortunes, expanding global businesses, conquering empires, waging holy wars against evil ideologies.
Our brains trap us in this bizarre paradox, a classic double bind: We can’t escape death nor escape our illusions. So we deny both, carrying within us these dark secrets hidden even from ourselves.
And yet, our secret dark side yearns for relief, searching for scapegoats, for someone to blame, to redeem us. So we often project our dark inner world onto others, someone we can label “evil,” someone we can bully, fight and conquer, someone to prove we are indeed good souls when we succeed in our heroic ventures.
But here’s the rub: All illusions inevitably backfire. Listen to Keen: “Our heroic projects that are aimed at destroying evil have the paradoxical effect of bringing more evil into the world … my gods against your gods … Our desire for the best is the cause of the worst.”
As a nation we are trapped in the illusion we’re the world’s sole military and economic superpower. As a result our “terror of dying” keeps breeding and recruiting more and more real live terrorists, and our “Axis of Evil” grows stronger, gets bigger, feeding on our anger and hatred, whether projected onto China, the Taliban or Goldman Sachs.
Storm warnings: Why Wall Street’s next meltdown is coming soon
Can we stop this self-destructive death-spiral of hatred? Earlier we reported on the many warnings in the years prior to the 2008 meltdown. They were ignored, And will be ignored the next time. Why? The warnings are real. And many. But America’s collective denial is so deep, so hidden, so powerful, we are deaf, blind. As Jeremy Grantham, CEO of a $100 billion money manager put it: “Several dozen people saw this crisis coming for years. It seemed so inevitable and so merciless. Yet the bosses of Merrill Lynch and Citi, even [Henry] Paulson and [Ben] Bernanke, none saw it coming, which guarantees that every time we get an outlying event they will always miss it.”
Unfortunately, “they cannot help themselves,” warns Susanne McGee in “Chasing Goldman Sachs: How the Masters of the Universe Melted Wall Street Down, and Why They’ll Take Us to The Brink Again,” When left to their own devices, financial-services firms will focus monomaniacally on what is in their own best interest … paying lavish bonuses, enticing perks. They cannot help themselves.” They will not only ignore, they will inflame, accelerate and guarantee the coming collapse.
The probabilities are high we’ll miss the next one as the new decade’s political, financial and economic forces grow stronger, merging as a perfect storm that will trigger America’s third major market/economic meltdown of the 21st century.
This collapse is virtually certain, coming around the 2012 elections. It will be bigger than the 2000 dot-com crash and the 2008 banking meltdown combined. But won’t the new just-approved “Basel III” rules prevent a new global meltdown?
No. Last week veteran Wall Street Journal editor George Melloan wrote an op-ed piece, “Basel’s Capital Illusions:” The “idea that Basel rules will make the world freer of financial crises is highly doubtful … The record since the Basel process began 22 years ago doesn’t generate faith in banking regulation either. Basel rules didn’t prevent the collapse of Japanese banking in 1990, they didn’t prevent the 2008 meltdown, and they are not preventing the banking failures that plague the financial system even today. .
“Given the inherent limitations of any effort to regulate and instill safety into highly complex and variable human transactions … we are likely to be disappointed” in the future.
More storm warnings you will ignore at your peril
- “The lesson of history is there will always be a temptation to stretch the limits. One common theme, excessive debt accumulation … We merrily roll along for an extended period when, bang, confidence collapses, lenders disappear, a crisis hits. History does point to warnings signs” but policy makers get “too drunk with their credit bubble-fueled success.” Reinhart & Rogoff, “This Time is Different: Eight Centuries of Financial Folly”
- “An unsustainable and crazy ‘doomsday cycle’ infiltrates our economic system … This cycle will not run forever. One day soon, we’ll have the boom and bust phases, but when we try the usual bailouts, they won’t work. … In 2008-09, we came remarkably close to another Great Depression. Next time, we may not be so lucky.”
Former IMF economist Simon Johnson, “13 Bankers: Wall Street Takeover & the Next Meltdown”
- “Of all the causes of the financial crisis, one of the biggest was a power shift on Wall Street that left the traders in charge. With a trader, the goal of every minute of every day is to make money. So if running the economy off the cliff makes you money, you will do it, and you will do it every day of every week.” Stephen Gandel, “The Case Against Goldman Sachs,”
- “A machine got built to enrich people for taking really stupid financial risks. … disguised the risks … too complicated for people in the end to understand the risks they were taking. And the machine ended up being fooled by its own deceit.”
Michael Lewis, “The Big Short: Inside the Doomsday Machine”
- “The future will be a total disaster, with a collapse of our capitalistic system as we know it today. Once a society becomes successful it becomes arrogant, righteous, overconfident, corrupt, decadent … overspends … costly wars … wealth inequity ... society enters a secular decline.”
Marc Faber, “GloomBoomDoom.com”
- “One of the disturbing facts of history is that so many civilizations collapse. Many civilizations share a sharp curve of decline. Indeed, a society’s demise may begin only a decade or two after it reaches its peak population, wealth and power.”
Jared Diamond, “Collapse: How Societies Choose to Fail/Succeed”
More storm warnings will be coming in the near future. We know America’s political, financial and economic leaders will ignore the warnings, as they did in the run-up to the 2008 meltdown, thus guaranteeing another meltdown … but hopefully some of America’s 95 million investors will hear us and prepare for the worst-case scenario.
Hugh Hendry on Hedge Funds
BBC HARDtalk's Stephen Sackur interviews hedge fund manager Hugh Hendry, CIO & CEO, Eclectica Asset Management.
Can the U.S. slip into outright deflation?
by David Rosenberg - Globe and Mail
The U.S. consumer price index for August came in pretty much as expected with a 0.3-per-cent gain, but the big news was the flat reading on the “core” index (which excludes food and energy). This is the metric that the markets and central banks focus on since food and energy tend to be volatile and related more to periodic supply factors than fundamental demand factors.
This CPI core index has now been at 0.1 per cent or below for nine of the past last 10 months and the year-over-year trend, at 0.9 per cent, has been below 1 per cent for five months running. Historically, back to 1957, I can only see this sub-1-per-cent trend happening for this long in 1960 – when the U.S. economy was in recession. So, after nearly two years of de facto zero per cent policy rates, a weaker U.S. dollar, dramatic expansion of the Fed's balance sheet and a 10-per-cent deficit-to-GDP ratio, the U.S. economy is on the precipice of a deflationary experience. Whether or not it actually happens is a different matter, but at the present time, the economy is flirting with it.
The last time the economy flirted with deflation was back in 2003 (when the Fed cut rates to 1 per cent), but back then it was led by the “goods” sector as the core goods CPI deflated to historic lows of minus 2.5 per cent on a year-over-year basis. At that time, the much larger share of the economy, “core services,” was still seeing positive pricing at plus 2.6 per cent. The low in core CPI inflation was then plus 1.1 per cent and the housing and credit boom ensured that we took off shortly after hitting that prior low.
Fast forward to today and the deceleration in core CPI has been more broadly based across both goods and services. The core goods CPI was running at plus 3 per cent at the turn of the year – amazingly, even with a soft U.S. dollar and firm commodity prices – and is now at plus 1.3 per cent. So this pace has been more than cut in half. The real kicker has been in core services. The aftershocks of the Great Recession have left disinflationary scars in other previously “cyclically insensitive” areas like education and health.
Delivery services and recreation are also currently disinflating at a pretty fast clip. The year-over-year trend in core services has slowed to a record low 0.7 per cent as of August after ending last year at 1.4 per cent. And, it's not clear from the trend or base-effects from last year that it has bottomed yet. At a fundamental level, the forces that most contributed to disinflation in the last 30 years were globalization and technological innovation that lead to dramatic improvement in productivity and ever-lower unit labour costs. There is no reason to doubt that these forces will remain intact in the future.
What is important is to look ahead to what all the variables are that will contribute to the deflation forecast, including the ongoing dampening effects that the credit contraction is exerting on aggregate demand as well as an aging baby boomer cohort that will increasingly be focused on saving rather than spending.
Of course, there are offsets from all the policy stimulus, but the reality is that the Fed does not have deflation as its base-case scenario and, as aggressive as chairman Ben Bernanke has shown he can be after the fact, rarely has he demonstrated an ability to be early. Putting it all together and it is reasonable to conclude that prices are most likely to be stable for a generation, perhaps even on a mild downtrend. After all, since the U.S. is looking more and more like Japan, it pays to take note that Japan's CPI sits right where it was 18 years ago when its deleveraging cycle was in its infancy.
While a deflationary spiral seems overly pessimistic even for a bear like me, the arithmetic still points in the direction of an ongoing decline in the underlying trend in consumer prices in the United States. For example, if the core goods CPI were to ever revert to its historic lows of 2003 and bump against the current historic low in the core services CPI, then we would indeed slip into a mild deflation.
Food for thought, because that prospect is not remotely priced into nominal bond yields, even with the 10-year Treasury note sitting around 2.7 per cent and the long bond yield just under the 4-per-cent mark. Nor does it seem likely that, in such a challenging pricing and revenue environment, we will see the double-digit earnings trend still currently embedded in equity market valuation.
Parents won't have wealth to pass on
by Angela Monaghan - Telegraph
Future generations should not expect to inherit wealth from their parents following the ravages of the worst financial crisis since the 1930s, a new report has warned. Of 6,010 Europeans questioned, just 10pc said they were actively intending to pass on "significant wealth" to their children, according to a survey of consumer finances by Janus Capital Group. A further 42pc said they had no intention of doing so, while the remaining 48pc said they were unsure.
The survey claimed the financial crisis has produced a generation of under-saving, risk-averse Europeans, which will challenge the future of "inter-generational wealth transfer". The responses of adults from the UK, France, Germany, Holland, Spain and Italy, showed the financial crisis has "fundamentally challenged the norms of financial wellbeing", according to Ric Van Weelden, head of Janus Capital's European business. "Specifically, the report highlights how few Europeans are likely to have made adequate provision for their retirement, let alone passing on wealth to the next generation. The financial services industry will have a very different landscape to serve going forward," he said.
Many who were relying upon returns from their long-term investments for later life and to pass down as inheritance have seen values wiped out, and extended life expectancy is placing additional pressure on finances. Of the six nations that took part in the survey, French respondents were most likely to pass on wealth, while their Spanish and German counterparts were the least likely.
In the UK, 16pc said they intended to pass on significant wealth to their children, 44pc said they had no intention and the remainder said they were unsure. David Bowers, of Absolute Strategy Research, which carried out the survey for Janus Capital, said: "Inter-generational wealth transfer is something we have taken for granted. "This is one generation when it may not happen as smoothly."
The report said that at present in the UK, the average estate is worth £90,000 and divided five ways, but Janus Capital said that is likely to change, with those aged 45 to 54 unable or unwilling to save sufficiently. "The financial crisis has exacerbated a tendency to under-save and to be risk averse. "Europe's working population has yet to wake up to the fact that it will not be able to retire as early as it would like, and indeed may have to work a lot longer," Mr Bowers said.
Greek bank stress tests delayed
by Kerin Hope and David Oakley - Financial Times
The international community has postponed bank stress tests for Greece to give the country breathing space as Athens prepares to test the success of its European roadshow last week by raising more money in the capital markets. The so-called “troika” – the International Monetary Fund, European Commission and European Central Bank – has agreed with Greece’s central bank to delay testing the solvency of the country’s struggling bank sector by one month to the end of October.
The delay means that the banks’ nine-month results could be assessed, as well as the outcome of a €1.7bn capital raising by National Bank of Greece, the country’s largest lender, which is due to be completed next month. “A successful offering by NBG would boost investor confidence...It would also accelerate mergers and acquisitions already under discussion,” said a senior Greek banker.
A short-term auction of three-month bills on Tuesday will test whether the Greeks and troika officials have made any headway in convincing overseas investors that they should buy the country’s debt. One investor said of the meeting in London on Wednesday last week: “The IMF official was particularly impressive and convincing, although there are still big question marks over whether Athens can avoid defaulting on their bonds.”
Greece borrowed more than €1bn in the capital markets on Tuesday last week in its first debt issue in two months. Although Athens had to pay very high rates for six-month loans in a sign that the problems for Greece and the eurozone are far from over, nearly a third of the buyers were international investors, according to debt managers. In the past, demand has been almost entirely from local banks.
Greek officials say the increase in international buyers is a positive sign for Athens, although bond yields have remained stubbornly high in the past week. Ten-year government bond yields ended the week at 11.54 per cent after jumping three days in a row. This compares with about 4.5 per cent in September last year before Greek officials admitted they had misled the EU over the country’s public finances.
Stress tests were conducted by the Committee of European Banking Supervisors, a European umbrella body, on 91 European banks in July. However, the tests were seen as lacking in rigour by many bankers and investors because they only measured the impact of haircuts on Greek government bonds in the so-called trading books. Government bonds in the so-called banking books, which are typically held to maturity, were not covered.
The IMF itself has become the problem as Europe's woes return
by Ambrose Evans-Pritchard - Telegraph
Once a quorum of big names says the game is up in a debt crisis, events move fast and furiously. Portugal neared the line on Friday when Diário de Noticias cited three ex-finance ministers warning that the country might have to call in the International Monetary Fund (IMF). One spoke of a "reckless reliance on foreign debt"; another spoke of "runaway public spending". No matter that all were complicit in euro membership, the policy that incubated this crisis and now traps Portugal in its depression.
Portugal was a net foreign creditor in the mid-1990s. EMU has turned it into a net foreign debtor to the tune of 109pc of GDP. That is what happens when you cut interest rates suddenly from 16pc to 3pc. Be that as it may, the comments struck a nerve. Yields on 10-year Portuguese debt surged to 6.15pc, back to May crisis levels when the EU faced its "Lehman moment" and launched a €750bn (£625bn) rescue blitz.
António de Sousa, head of Portugal's bank lobby, said his members are in dire straits. Banks cannot raise funds abroad, remain "extremely fragile", and "quite simply" will have nothing more to lend unless foreign capital returns. Portuguese banks cannot survive on local savings. They rely on foreign funding to cover 40pc of assets (IMF data). Hence an urgent meeting between the central bank governor and President Cavaco Silva for an hour-and-a-half late on Friday. The governor said global funding for Portugal was drying up. Markets would no longer tolerate Portugal's leisurely pace of fiscal tightening.
Hours later, Portugal's leaders agreed to draft an emergency budget. So much for hopes that they could avoid cuts and let growth trim the deficit from 9.3pc of GDP in 2009 to 7.3pc. The first casualty is the high-speed train to Madrid. Yet what exactly will austerity achieve? Combined private and public debt is 325pc of GDP (viz 247pc for Greece), so the country already risks a debt-compound spiral. Lisbon has been cutting state jobs for several years. This has certainly crimped growth, but not cured the problem. Productivity is stuck at 64pc of the EU average. The brutal truth is that Portugal lost competitiveness on a grand scale on joining EMU and has never been able to get it back. Convergence never came.
Ireland has shown what happens when you grasp the fiscal nettle, slashing public wages by 13pc – to applause from EU elites – without offsetting monetary and exchange stimulus. Irish bonds have spiked even higher to a post-EMU record 6.38pc. This was triggered by two client notes: Barclays said Ireland may need the IMF's help; Citigroup's Willem Buiter said Ireland "may not be able to make whole" creditors of both sovereign debt and the bank. Dr Buiter has also said a default by Greece is "a high probability event".
Two years into its purge, Ireland has a budget deficit near 20pc of GDP. It is 12pc if you strip out the bank rescues, but the reason why the bad debts of Anglo Irish keep spiralling upwards is that the economy keeps spiralling downwards. House prices have fallen 35pc. Nominal GDP has contracted 19pc. "Ireland's debt is ballooning, while its capacity to pay has collapsed," said Simon Johnson, ex-chief economist at the IMF. He said the country has made a Faustian pact with Europe, able to draw ECB loans worth 75pc of GDP so long as Irish taxpayers shield European creditors.
In any case, the IMF itself has become the problem, operating as an arm of EU ideology under Dominique Strauss-Kahn. It offers no remedy since it acquiesces in the EU's ban on debt-restructuring. In Greece it backs a policy that will leave the country with public debt of 150pc of GDP after its ordeal – allowing French and German creditors to shift a big chunk of Greek risk to Asian taxpayers through the IMF, and to EU taxpayers through the eurozone rescue.
Mr Strauss-Kahn committed up to €250bn of IMF money for Europe's rescue without prior approval from the IMF Board, to the fury of Asian directors. He has promulgated an insidious doctrine that sovereign defaults are "Unnecessary, Undesirable, and Unlikely".
Let us be honest, the Fund has become a font of incoherence, an engine of moral hazard. In August, it abolished its credit ceiling and created a new tool to rush fresh debt to states that need more debt like a hole in the head. Simon Johnson says the solution for EMU's orphans is debt reduction along the lines of "Brady Bonds" in Latin America in the 1980s, forcing creditors to share pain in an orderly fashion and giving debtors a way out of the morass.
In fairness to EU policymakers, perhaps the problem really is so big that if they let Greece, Portugal, or Ireland restructure debt they risk instant contagion to Spain, and from there to Italy. Perhaps they really have no choice. If so, monetary union has created a monster.
Europe Debates How to Avoid Another Debt Crisis
by Matthew Saltmarsh and Stephen Castle - New York Times
European officials are jostling over plans to tighten the region’s fiscal rules to ward off another sovereign debt crisis, but agreement on anything that could be enforced by meaningful sanctions is far from certain.
At the same time, some observers are arguing that any changes might be a sideshow and that the real means of avoiding problems in the future lies in the discipline imposed by investors who are asked to finance government debts — a fundamental rethinking of the way the euro works. With the decade-old euro project nearly brought down this year by the profligacy of Greece, pressure is again building — notably from German and French leaders — to enact rule modifications that bring about real changes in behavior.
How times have changed. Back in 2003, the rules were effectively cast aside when France and Germany persuaded their partners to block planned sanctions against them for exceeding the fiscal deficit ceiling. Since then, the rules have been more loosely interpreted even as the number of countries breaching them has exploded. According to Eurostat, the latest data from 2009 shows that of the 27 members of the European Union, only Denmark, Estonia, Luxembourg, Sweden and Finland had deficits below the pact’s limit of 3 percent of gross domestic product.
Now, because of the political crisis over the Greek bailout, there are many views on how tough the new rules should be, and even who should be in charge of rewriting them. The European Commission, which alone has the formal power to propose changes, is working on one set. So is a committee drawn from the bloc’s 27 member states, which have to sign off on them — not to mention foot any bill.
It is unclear how the two sets of proposals will be reconciled. The issue has the potential to escalate into a long and ugly institutional tussle, further undermining the euro’s stability. Indeed, the debate over the budget rules goes to the heart of the success or failure of the euro project. The sovereign debt crisis showed the inherent problems of running a currency union without central fiscal authority. Yet sovereign countries are reluctant to hand over politically tricky tax and spending policy to an unelected committee.
In a speech last week, the managing director of the International Monetary Fund, Dominique Strauss-Kahn, made clear his preference for a “centralized fiscal authority, with political independence,” comparable to that of the European Central Bank. Mr. Strauss-Kahn conceded, though, that the chances of national governments ceding control over their budgets “appears unlikely in the foreseeable future.” Undeterred, the European Commission is preparing to present its ideas soon. These are likely to add a country’s ratio of debt to gross domestic product as a criterion that could lead to sanctions, rather than just deficit ratios, as is the case now.
Under the current rules, euro one countries can eventually be fined up to 0.5 percent of their G.D.P. each year if it is agreed to by a majority of ministers. Such a fine has never been imposed. One alternative being discussed would be to withhold so-called structural and cohesion funds, which are allocated by Brussels primarily to the bloc’s poorer nations. Mr. Strauss-Kahn also suggested that fines could be “smoothed” over time by trimming such transfers.
But political and legal objections to more complex sanctions have been raised — not least because they could push economically weak nations into deeper trouble. In March, Chancellor Angela Merkel of Germany described the idea of fining countries in financial trouble as “idiotic.” There also has been a suggestion of suspending political voting rights for countries that breach budget limits. Paris and Berlin sent a letter to Herman Van Rompuy, president of the European Council, in July backing the idea of withdrawing voting rights within the union from budget offenders.
But officials worry about the political fallout and whether Paris or Berlin would be willing to apply the sanction to themselves. Because of the difficulty of achieving consensus, the governmental committee, led by Mr. Van Rompuy, is now focusing on securing an agreement among the nations that use the euro, an easier task than reaching consensus among all 27 nations of the European Union. But even here there are complications.
One involves how to calculate the level of debt. Several of the union’s newer member states argue that pension obligations must be considered when calculating debt levels. Italy is pressing for private as well as public debt to be taken into account. The debate is delicate because several nations have debt levels greater than 60 percent of G.D.P., the original ceiling set out for membership of the euro. That means that any future sanctions could apply widely.
Mr. Van Rompuy’s group will meet again at the start of next week. It aims to present initial findings to leaders at a summit at the end of October. Mr. Van Rompuy may seek to extend the group’s mandate to discuss measures that would involve a change to the European Union treaty. This would require agreement of all 27 nations and might involve time-consuming and politically risky referendums in some. For that reason, most nations oppose the idea. So officials are now focusing on working within the existing rule book, arguing that the union’s new Lisbon Treaty allows them sufficient leeway.
Sixten Korkman, director of the Research Institute of the Finnish Economy, said treaty changes were unlikely, given their legal and political complexity. But he said certain rule changes within the current framework could be effective — notably, improving the independence of fiscal policy in certain weak members, particularly Greece. He also backed some kind of mechanism to restructure ballooning debts through discounts on bond holdings, whereby investors also pay a price; and establishing a means for the European Central Bank to make it more expensive for countries with weak finances to get access to funds.
David Clark, a former adviser to the British government on European affairs, said tinkering with the current rules would only prolong the “inherent instability” of the economic and monetary union. He said a fundamental problem needed to be addressed, formally or informally: how to “rebalance” the euro zone’s structure. Currently, he argued, Germany’s export-oriented economy is accruing the benefits, while poorer neighbors are being forced to retrench. Mr. Korkman added: “What is most important is the behavior of investors and politicians. I think and hope that this crisis has been a steep learning curve for both.”
Wall Street’s Engines of Profit Are Slowing Down
by Nelson D. Schwartz - New York Times
Inside the great investment houses on Wall Street, business has taken a surprising turn — downward.
Even after taxpayer bailouts restored bankers’ profits and pay, the great Wall Street money machine is decelerating. Big financial institutions, including commercial banks, are still making a lot of money. But given unease in the financial markets and the economy, brokerages and investment banks are not making nearly as much as their executives, employees and investors had hoped. After an unusually sharp slowdown in trading this summer, analysts are rethinking their profit forecasts for 2010.
The activities at the heart of what Wall Street does — selling and trading stocks and bonds, and advising on mergers — are running at levels well below where they were at this point last year, said Meredith Whitney, a bank analyst who was among the first to warn of the subprime mortgage disaster and its impact on big banks. Worldwide, the number of stock offerings is down 15 percent from this time last year, while bond issuance is off 25 percent, according to Capital IQ, a research firm. Based on these trends, Ms. Whitney predicts that annual revenue from Wall Street’s main businesses will drop 25 percent, to around $42 billion in 2010, from $56 billion last year.
While the numbers will not be known until after the third quarter ends and financial companies begin reporting earnings in October, the pace of trading this summer was slow even by normal summer standards. Trading in shares listed on the New York Stock Exchange was down by 11 percent in July from 2009 levels, and August volume was off nearly 30 percent. “What’s happened in the third quarter is that after a very slow summer, people expected things to come back,” said Ms. Whitney. “But they haven’t, and the inactivity is really squeezing everyone.”
The downward slide on Wall Street parallels a similar shift in the broader economy, which has slowed considerably since showing signs of a nascent recovery this spring. And if banks come under pressure, all but the safest borrowers may struggle to get loans. With less than two weeks to go in the third quarter, companies will be hard-pressed to fulfill earlier, more optimistic expectations. “It’s like the marathon: if you’re five miles behind, you can’t make that up in the last 10 minutes of the race,” said David H. Ellison, president of FBR Fund Advisers, a money management firm that specializes in financial companies. Many banks are barely scraping by in traditional Wall Street business.
As a result, executives, portfolio managers and analysts say that even the mighty Goldman Sachs, which posted a profit every day for the first three months of the year, is unlikely to deliver the kind of profit growth that investors have come to expect. Keith Horowitz, a bank analyst at Citigroup, said he expected Goldman Sachs to earn $7.8 billion in 2010, a 35 percent decline from the $12.1 billion it made last year. The drop in trading translates into lower commissions for brokerage firms, as well as a weaker environment for underwriting initial public offerings and other stock issues, traditionally a highly lucrative niche.
Banks are also scaling back on making bets with their own money — known as proprietary trading — another huge profit source in recent years that will soon be forbidden under terms of the financial reform legislation passed by Congress this summer. Indeed, analysts have finally started to bring their forecasts in line with the new reality. On Sept. 12, Mr. Horowitz reduced his estimates for third-quarter profits at Goldman and Morgan Stanley.
Mr. Horowitz had predicted Goldman would make $1.75 billion in the third quarter, or $3 a share; he now expects Goldman’s profit to total $1.34 billion, or $2.30 a share. For Morgan Stanley, his revision was even steeper, with earnings expectations revised downward to $140 million, or 10 cents a share, from $726 million, or 53 cents a share. Mr. Horowitz’s estimates are considerably lower than the consensus among analysts who track the two companies. If the other analysts revise their estimates closer to his, they would put pressure on the shares.
One of the rare bright spots for Wall Street recently has been the issuance of junk bonds, as ultra-low interest rates encourage investors to seek out riskier debt that carries a higher yield. But that will not be enough to offset the weakness elsewhere, said one top Wall Street executive who insisted on anonymity because he was not authorized to speak publicly for his company, and because final numbers would not be tallied until the end of the month.
To make matters worse, he said, many Wall Street firms increased their work forces in the first half of the year, before the mood shifted and worries of a double-dip recession arose. If activity remains anemic, firms could soon begin cutting jobs again. “I think the summer was horrible for everyone, and no one expected it to be as bad as it was,” he said. “It’s coming back a little bit in September but nowhere near enough to make up for what happened in July and August.”
The profit picture is brighter for diversified companies like JPMorgan Chase and Bank of America, which have larger commercial and retail banking operations in addition to their Wall Street units, but some analysts say earnings expectations for them could come down as well. “Estimates still seem a little high, and the revenue story for all the banks is not a good one,” said Ed Najarian, who tracks the banking sector for ISI, a New York research firm. With interest rates plunging, banks are making less off their interest-earning assets like government bonds and other ultra-safe securities. At the same time, demand for new loans remains weak.
One wild card will be the credit card portfolios at major banks like JPMorgan, Bank of America and Citigroup. As delinquencies ease, Mr. Najarian said, credit losses are likely to decline. That trend helped earnings at JPMorgan in the second quarter, and could be crucial again in the third quarter.
Ms. Whitney says the gloomy short-term predictions foreshadow a series of lean years in the broader financial services industry. Indeed, she said the Street faced a “resizing” not seen since the cutbacks that followed the bursting of the dot-com bubble a decade ago. “We expect compensation to be down dramatically this year,” she wrote in a recent report. She predicts the American banking industry will lay off 40,000 to 80,00 employees, or as many as 1 in 10 of its workers.
That may be extreme, but Ms. Whitney argues that the boom years are not coming back anytime soon. As both consumers and companies cut back on debt, and financial reform rules put the brakes on profitable niches like derivatives and proprietary trading, the engines of earnings growth for the last decade will continue to sputter.
Bank of America Cutting Staff in Cap Markets Group
by Charlie Gasparino - FOX
Bank of America appears to be the first major financial firm to start cutting jobs as a growing number of analysts predict a Wall Street profit slowdown will pick up steam for the rest of the year, FOX Business has learned. Though the cuts are said to be modest in size — around 5%, and only in certain profit-challenged areas of the bank’s capital markets unit — the move to trim jobs by capital markets chief Tom Montag is seen as significant inside the bank, people close to the matter say.
Montag had been increasing the size of his capital markets staff, which includes bankers and traders, all year. Now, though there’s no official hiring freeze, he’s in the cut-back mode, these people say. The cuts are expected to be announced this week and will impact trading desks, which have been hardest hit by the recent profit squeeze among the big banks. A Bank of America spokesman refused to deny that cuts are coming this week, but the spokesman said for the year that headcount in the capital markets arm of the big bank “is continuing to expand,” and that the business as whole is “performing soundly.”
People inside Bank of America are grousing that Montag is cutting staff now so as to deprive the unlucky employees year-end bonuses. The spokesman refused to comment on the bonus issue. All major financial firms are bracing for a difficult third quarter, which will result in lower profits, and likely layoffs. At Morgan Stanley, for instance, senior executives have been told to expect sharply lower year-end bonuses. At Goldman Sachs, bonuses could decline 10% from last year’s levels. Wall Street firms are experiencing a profit pullback thanks to a combination of relatively low investment-banking activity, lower trading volumes and increased costs from new regulations.
The Q Ratio Indicates a Significantly Overvalued Market
by Doug Short - Dshort.com
Note from dshort: The charts below have been updated based on the September 17th Federal Reserve Flow of Funds release for Q2. I've also used the Vanguard Total Market ETF for extrapolating the Q Ratio up to the present.
The Q Ratio is a popular method of estimating the fair value of the stock market developed by Nobel Laureate James Tobin. It's a fairly simple concept, but laborious to calculate. The Q Ratio is the total price of the market divided by the replacement cost of all its companies. The data for making the calculation comes from the Federal Reserve Z.1 Flow of Funds Accounts of the United States, which is released quarterly for data that is already over two months old.
The first chart shows Q Ratio from 1900 through the first quarter of 2010. I've also extrapolated the ratio since June based on the price of VTI, the Vanguard Total Market ETF, to give a more up-to-date estimate.
Interpreting the Ratio
The data since 1945 is a simple calculation using data from the Federal Reserve Z.1 Statistical Release, section B.102., Balance Sheet and Reconciliation Tables for Nonfinancial Corporate Business. Specifically it is the ratio of Line 35 (Market Value) divided by Line 32 (Replacement Cost). It might seem logical that fair value would be a 1:1 ratio. But that has not historically been the case. The explanation, according to Smithers & Co. (more about them later) is that "the replacement cost of company assets is overstated. This is because the long-term real return on corporate equity, according to the published data, is only 4.8%, while the long-term real return to investors is around 6.0%. Over the long-term and in equilibrium, the two must be the same."
The average (arithmetic mean) Q ratio is about 0.70. In the chart below I've adjusted the Q Ratio to an arithmetic mean of 1 (i.e., divided the ratio data points by the average). This gives a more intuitive sense to the numbers. For example, the all-time Q Ratio high at the peak of the Tech Bubble was 1.82 — which suggests that the market price was 158% above the historic average of replacement cost. The all-time lows in 1921, 1932 and 1982 were around 0.43, which is 57% below replacement cost. That's quite a range.
Another Means to an End
Smithers & Co., an investment firm in London, incorporates the Q Ratio in their analysis. In fact, CEO Andrew Smithers and economist Stephen Wright of the University of London coauthored a book on the Q Ratio, Valuing Wall Street. They prefer the geometric mean for standardizing the ratio, which has the effect of weighting the numbers toward the mean. The chart below is adjusted to the geometric mean, which, based on the same data as the two charts above, is 0.65. This analysis makes the Tech Bubble an even more dramatic outlier at 179% above the (geometric) mean.
The More Complicated Calculation of Tobin's Q
John Mihaljevic, who was Dr. Tobin's research assistant at Yale and collaborated with Tobin in revising the ratio formula, uses a more complex formula based on the Flow of Funds data for calculating Q. The formula is explained in detail at Mihaljevic's Manual of Ideas website. The chart below uses the Mihaljevic/Tobin formula for the Q calculation.
I would make two points about the more intricate formula. First it produces results that are remarkably similar to the simple calculation (first chart above. Also, the chart here differs somewhat from the version posted at the Manual of Ideas website (reproduced here), even though my chart uses the Manual of Ideas calculation formula. I've corresponded with John about the differences, and he explained them as an artifact of undocumented revisions to the government's Flow of Funds data. The Manual of Ideas Q Ratio is updated quarterly when the latest Z.1 numbers are released, and no changes are made to the ratio for previous quarters. My charts were built from scratch with the historic Z.1 data with any undocumented revisions included.
Note: My calculations with the last two Z.1 releases confirm John's explanation of undocumented Fed tinkering with the older data. The changes are relatively minor, but they have resulted in over a dozen quarterly Q modifications ranging from -0.01 to +0.02, with the upward adjustments clustered toward the recent quarters.
Unfortunately, the Q Ratio isn't a very timely metric. The Flow of Funds data is over two months old when it's released, and three months will pass before the next release. To address this problem, I've been making extrapolations for the more recent months based on changes in the market value of the VTI, the Vanguard Total Market ETF, which essentially becomes a surrogate for line 32 in the data. The last two Z.1 releases have validated this approach. The extrapolated ratios for July, August and September (to date) are 0.97, 0.92, 0.99 respectively.
Bottom Line: The Message of Q
The mean-adjusted charts above indicate that the market remains significantly overvalued by historical standards — by about 41% in the arithmetic-adjusted version and 52% in the geometric-adjusted version. Of course periods of over- and under-valuation can last for many years at a time.
The Illusion of Pension Savings
by Mary Williams Walsh - New York Times
Earlier this year, Illinois said it had found a way to save billions of dollars. It would slash the pensions of workers it had not yet hired. The real-world savings would not materialize for decades, of course, but thanks to an actuarial trick, the state could start counting the savings this year and use it to help balance its budget.
Actuaries, including some who serve on the profession’s governing boards, got wind of what Illinois was doing and began to look more closely. Many thought Illinois was using an unorthodox maneuver to starve its pension fund of billions of dollars, while papering over a widening gap between what it owed and how much it had. Alarmed, they began looking for a way to discourage Illinois’s method before other states could adopt it.
They are too late. The maneuver, and techniques that have similar effects, are already in use in Rhode Island, Texas, Ohio, Arkansas and a number of other places, allowing those states to harvest savings today by imposing cuts on workers in the future.
Texas saved millions of dollars this year after raising its retirement age for future hires and barring them from counting unused sick leave in their pensions. More savings will appear in coming years. Rhode Island also raised its retirement age for future retirees last year, after being told it could save $90 million in the first year alone. Actuaries have been using the method for years, it turns out, but nobody noticed, in part because official documents usually describe it in language few can understand.
The technique is fairly innocuous in normal times, allowing governments to smooth out their labor costs over many years. But it becomes much riskier when pension funds have big shortfalls, when they need several decades to pay down their losses and when they are cutting benefits for future workers — precisely the conditions that exist today.
“In a plan that is not well funded, I wouldn’t recommend it,” said Norm Jones, chief actuary for Gabriel Roeder Smith & Company, an actuarial firm that helps Illinois and a number of other states that have adopted the method. He said the firm’s actuaries informed officials of the risks and it was the officials’ decision to use the technique.
Struggling states and cities need to save money, but they run into legal problems if they tamper with the pensions their current workers are building up year by year. So most places have opted to let current workers and retirees go unscathed. Colorado, Minnesota and South Dakota are the exceptions, dialing back cost-of-living increases for people who have already retired. All three states have reaped meaningful savings right away, and all three are being sued.
Cuts for workers not yet hired do not save much money in the present — but that’s where actuaries can work their magic. They capture the future savings for use today by assuming, in essence, that 100 percent of today’s work force is already earning tomorrow’s skimpier benefits. When used in actuarial calculations, that assumption has a powerful effect. It reduces the amount a government must put into its workers’ pension fund every year.
That saves the government money. But it undermines the pension fund, which must still pay the richer benefits of today’s retirees. And because the calculations are esoteric, it is hard for anyone except a seasoned actuary to see what is going on.
“Responsible funding methods do not work this way,” said Jeremy Gold, an independent actuary in New York who has been outspoken about the distortions built into pension numbers. He said the technique was much like the mortgages with very low teaser rates that proliferated during the housing bubble. “You aren’t paying down your principal,” Mr. Gold said. “You’re not even keeping up with the interest. You are actually increasing your debt every year.”
Dubious pension numbers in Illinois are not easily shrugged off after a warning shot fired by the Securities and Exchange Commission in August. The S.E.C. accused New Jersey of securities fraud, saying the state had manipulated its pension numbers to look like a better credit risk, while selling some $26 billion worth of bonds. The S.E.C. had never before taken action against a state. Now the commission is flexing its muscles, unleashing a team of specialized enforcement officials to look for more misleading public pension numbers.
An official with the S.E.C. declined to comment on Illinois’s maneuver. Commission rules bar officials from discussing investigations or revealing whether one might be in progress. Kelly Kraft, a spokeswoman for the Illinois Governor’s Office of Management and Budget, said the S.E.C. had not contacted the state and officials were confident that their disclosures were complete and accurate.
Officials in Rhode Island did not respond to phone calls seeking information about how the state achieved its pension savings. In other states, including Texas and Arkansas, officials said they were confident they were in compliance with the relevant statutes. Actuaries must disclose their methods and assumptions, but this one has been hidden in plain view because it often goes by the name of a method that is widely used and is accepted by the Governmental Accounting Standards Board.
The technique falls into a family of complex and subtle calculations called “cost methods,” which actuaries use to spread pension costs over many years. Few outside of the profession know how the cost methods work or what their names mean. Illinois issued public documents this year naming its cost method as one that did not permit the cost of future employees’ benefits to be factored into the current year’s contributions. The apparent contradiction caught actuaries’ attention.
Sandor Goldstein, an actuary in Springfield, Ill., who helps the state operate some of the pension funds in its big system, acknowledges that Illinois’s disclosures are “somewhat misleading.” Mr. Goldstein made his remarks in a letter requested by the state, after an article in The New York Times raised questions about Illinois’s numbers. He recommended that the state clarify its disclosures. He also said he had warned the state that its funding method “may not be an appropriate one.”
Mr. Jones, of Gabriel Roeder Smith, said Illinois’s disclosures might be “an incomplete description of the process,” but added that state officials “were probably trying not to get into a lot of technical detail that would be poorly understood anyway.” Illinois’s pension funds are more fragile than most, but their survival is essential to thousands of people. The state’s teachers and certain other workers do not participate in Social Security, so for them, the pension fund is their only source of retirement income.
Frank Todisco, senior pension fellow at the American Academy of Actuaries, declined to comment on the situation in Illinois, but said the Actuarial Standards Board was working on revised standards that, if adopted, would clarify actuarial assumptions and lead to more detailed descriptions of risk. “It’s a deliberative process,” he said. “We have to follow due process, and that sometimes takes a long time from start to finish.” It can easily take several years to revise an actuarial standard. That may not be fast enough to help Illinois’s pension system, which continues to sink. “When you’re in a deep hole, it’s a long way out,” said Mr. Jones.
Did Bill Gross Just Confirm On Live TV He Has An "Advance Look" At Non-Public Fed Data?
by Tyler Durden - Zero Hedge
Recent speculation that PIMCO enjoys trading by piggybacking on what the Fed will do in the future has hopefully not escaped our readers. As we highlighted in Pimco Offloads $40 Billion In Treasurys, As Frontrunning Fed Creates Billions Of Profits; Gross Does Not Expect QE 2 On Sept. 21; Pimco's "Fed Frontrunning" Tell Exposed, Mr. Gross has a knack of buying up on margin either MBS (ahead of QE1) or USTs (ahead of QE Lite), precisely before the points when there is a big marginal push in prevailing prices higher.
The fact that he did not do so in the last month confirmed to us at least that the Fed was not going to engage in QE2 on September 21 (which turned out to be the case). Yet it is one thing to speculate based on indirect evidence, and something totally different to hear Mr. Gross on primetime TV essentially validating that he just may have an inside line to the Federal Reserve Board. In all the commotion over yesterday's FOMC announcement, some may have missed the following line uttered by the Newportbeachian:"What is important going into November is the staff forecast for economic growth for the next 12-18 months. Our understanding is that the Fed is about to downgrade their forecast from 3% down to 2%." At which point the CNBC anchors conveniently confirm that Mr. Gross just disclosed something which is completely non-public: "We don't have that forecast yet, right Steve?.. We won't get that for 3 weeks Erin that's when it comes out with the minutes of this meeting."
Well, we won't, but Mr. Gross, who manages $1.2 trillion in debt, almost as much as the entire Federal Reserve, sure seems to already have access to it.
While in this country, whose corruption has reached a level that is unprecedented in history, nothing would surprise anyone anymore, perhaps the Fed would at least do the right thing and share the fact that the economy is collapsing not just with the preferred monopolistic purchaser of USTs and MBS, but with all those who naively continue to buy stocks in the hope that a rebound may be "just around the corner."
Fast forward to 5.20 in the below video for the relevant section.
UK Proposes All Paychecks Go to the State First
by Robin Knight - CNBC
The UK's tax collection agency is putting forth a proposal that all employers send employee paychecks to the government, after which the government would deduct what it deems as the appropriate tax and pay the employees by bank transfer. The proposal by Her Majesty's Revenue and Customs (HMRC) stresses the need for employers to provide real-time information to the government so that it can monitor all payments and make a better assessment of whether the correct tax is being paid.
Currently employers withhold tax and pay the government, providing information at the end of the year, a system know as Pay as You Earn (PAYE). There is no option for those employees to refuse withholding and individually file a tax return at the end of the year. If the real-time information plan works, it further proposes that employers hand over employee salaries to the government first. "The next step could be to use (real-time) information as the basis for centralizing the calculation and deduction of tax," HMRC said in a July discussion paper.
HMRC described the plan as "radical" as it would be a huge change from the current system that has been largely unchanged for 66 years. Even though the centralized deductions proposal would provide much-needed oversight, there are some major concerns, George Bull, head of Tax at Baker Tilly, told CNBC.com. "If HMRC has direct access to employees' bank accounts and makes a mistake, people are going to feel very exposed and vulnerable," Bull said. And the chance of widespread mistakes could be high, according to Bull.
HMRC does not have a good track record of handling large computer systems and has suffered high-profile errors with data, he said. The system would be massive in terms of data management, larger than a recent attempt to centralize the National Health Service's data, which was later scrapped, Bull said. If there's a mistake and the HMRC collects too much money, the difficulty of getting it back could be high with repayments of tax taking weeks or months, he said.
"There has to be some very clear understanding of how quickly repayments were made if there was a mistake," Bull said. HMRC estimated the potential savings to employers from the introduction of the concept would be about £500 million ($780 million). But the cost of implementing the new system would be "phenomenal," Bull pointed out. "It's very clear that the system does need to be modernized… It's outdated, it's outmoded," Emma Boon, campaigner manager at the Tax Payers' Alliance, told CNBC.com.
Boon said that the Tax Payers' Alliance was in favor of simplifying tax collection, but stressed that a new complex computer system would add infrastructure and administration costs at a time when the government is trying to reduce spending. There is a further concern, according to Bull. The centralized storage of so much data poises a security risk as the system may be open to cyber crime. As well as security issues, there's a huge issue of transparency, according to Boon. Boon also questioned HMCR's ability to handle to the role effectively.
The Institute of Directors (IoD), a UK organization created to promote the business agenda of directors and entreprenuers, said in a press release it had major concerns about the proposal to allow employees' pay to be paid directly to HMRC. The IoD said the shift to a real-time, centralized system could be positive as long as the burden on employers was not increased. But it added that the idea of wages being processed by HMRC was "completely unacceptable." “This document contains a lot of good ideas. But the idea that HMRC should be trusted with the gross pay of employees is not one of them," Richard Baron, Head of Taxation at the IoD, said in the release. A spokesperson for Chancellor of the Exchequer George Osborne was not immediately available for comment.
Irish borrowing costs at new high on debt worries
by Shawn Pogatchnik - AP
Ireland's cost of borrowing reached its highest point in the euro era Monday as investors sold off government bonds on speculation of financial and government instability. The interest rates on Irish 10-year bonds surpassed 6.5 percent on the eve of a major auction of new Irish treasuries. Fears were exacerbated as Cabinet ministers denied any move to replace Prime Minister Brian Cowen over his recent stumbling media performances.
The gap between Irish and German bonds — the benchmark of lending safety in the 16-nation euro zone — also exceeded 4 percentage points Monday for the first time since the common currency's launch in 1999. The previous record high for Irish bonds was 6.35 percent reached Friday when Dublin media reports fanned fears of a growing risk of an International Monetary Fund bailout. Bond interest rates rise as prices fall, and higher rates mean dwindling confidence in a borrower. Higher rates also make it more expensive to borrow money and can hurt state finances.
The IMF and Irish officials have dismissed fears of an Irish default or emergency rescue, but the rising interest rates demonstrate that investors see increased risk in lending to the heavily indebted government. Ireland is currently rated the sixth-riskiest national borrower, just ahead of Portugal and Iraq. Dublin-based analysts said investors were selling Irish bonds heavily in advance of Tuesday's planned auction of euro1.5 billion ($2 billion) in new 4-year and 8-year issues.
They expect the European Central Bank — which already owns more than euro16 billion in Irish bonds, representing a fifth of Ireland's national debt — to help ensure that the bonds are fully purchased. While some foreign analysts say Ireland could seek aid from the emergency EU-IMF fund if its recession-battered economy worsens, local analysts say such speculation ignores Ireland's current funding abilities. An Irish investment fund, Glas Securities, said in a note to investors that Ireland has already secured sufficient funds for the rest of the year and also retains immediate cash reserves exceeding euro20 billion.
"Reports that Ireland may be forced to call on aid from the EU and IMF are overstated in our view," Glas Securities said, arguing that the government would turn to its cash reserves "before even considering any calls to the EU/IMF." Several Cabinet ministers rallied to Cowen's defense Monday after Tom Kitt, a lawmaker in his ruling Fianna Fail party, said he should agree to step down as leader or be ousted if he refuses.
Kitt argued that Cowen's often glum, aggravated speaking style — and recent televised apology for one particularly poor national radio interview — was failing to inspire public understanding or support for Ireland's efforts to support its banks or slash its deficit. But the most likely candidate to succeed Cowen, Finance Minister Brian Lenihan, said he wasn't interested in replacing Cowen, only in pulling Ireland out of its financial difficulty. "Certainly nobody has suggested to me that I should make a move," Lenihan said.
And Justice Minister Dermot Ahern, another potential leadership candidate, said Ireland couldn't afford to change leaders now. "The last thing we need at this time is upheaval in the government or our party. It just won't help the country," Ahern said. Ireland enjoyed more than a decade of Europe-leading growth, but the Celtic Tiger economy has plummeted since its central pillar — a boom in construction and property speculation — collapsed in 2008. The recession has slashed government tax collections, driven unemployment to a 16-year high, and fueled a surging deficit that could exceed 20 percent of GDP this year.
Cowen is committed to slashing another euro3 billion from the deficit in the 2011 budget even though such cuts risk weakening Ireland's already slack economy. He has already imposed two years of similar cuts and tax rises that have slashed household incomes across this nation of 4.5 million. Irish Central Bank governor Patrick Honohan told a conference on European monetary policy Monday that Cowen has no choice but to cut even more than euro3 billion in December's budget plans. He said international investors need to see Ireland's tax collections and spending placed "on a convincingly convergent path," otherwise the interest on government borrowing would remain too high.
Europe's €440bn rescue fund wins AAA just in time
by Ambrose Evans-Pritchard - Telegraph
Standard & Poor’s and Fitch have both granted the Eurozone’s rescue fund a AAA credit rating, clearing the way for swift action if needed as the region’s debt crisis threatens to erupt again. Goldman Sachs warned clients of a "measurable risk" that both Ireland and Portugal may have to tap the €440bn European Financial Stability Facility (EFSF), though "probably only early next year" since both countries have adequate funding for several months.
Spreads on Irish and Portuguese bonds reached a post-EMU high on Monday as investors braced for difficult debt auctions this week. Yields on Ireland’s 10-year bonds reached 6.5pc. The allure of EFSF funds at 5pc, though on shorter maturities, is rising by the day. Portugal’s president Cavaco Silva said his country would honour its debts without turning to Europe or the International Monetary Fund. "We will sort out our own problems," he said. Ex-finance minister Felix Bagão said the country had blinded itself with "half-truths, lies, fantasies, and delusions", warning that the current minority government may struggle to find the votes for further austerity.
Patrick Honohan, governor of Ireland’s central bank, said Dublin must bite the bullet "soon" on fresh spending cuts, if it is to bring debt dynamics under control. This message is starting to test political patience. Public wages have already been cut 13pc on average. The AAA rating for the EFSF has raised eyebrows since half the contributing members are not AAA and Germany’s constitutional court has not yet ruled on the legality of the body.
S&P’s Moritz Kraemer said the rescue fund is the "cornerstone" of Europe’s strategic policy and draws on formidable solidarity. A reserve cushion means that funding up to €350bn is fully covered by AAA contributors such as Germany, France, and Holland. Several cases have been filed at the Germany’s top court arguing that the rescue is a breach of the "no bail-out" clause of the Maastricht Treaty, or a threat to monetary stability, or that it was pushed through Germany’s parliament without a two-thirds majority.
The litigants include a group of eurosceptic professors, and Bavarian politician Peter Gauweiler. Bundesbank chief Axel Weber has been called to testify on the bail-out, probably in October. He has been openly critical of the European Central Bank’s purchases of Greek, Irish, and Portuguese bonds, which is part of the rescue deal. The challenges have been greatly boosted by the admission of France’s Europe minister Pierre Jouyet that EU political leaders had "rewritten the EU Treaties" at their emergency summit in early May. This a grave matter. Any treaty change requires the ratification of all 27 sovereign parliaments.
Mr Kraemer said a negative ruling was highly unlikely. "We are comfortable after looking at past decisions that the court will decide in a way that is favourable to the EFSF. This is not a bail-out fund because the money is a not a donation. Countries have to pay high interest, and German taxpayers may make a profit," he said. "However, it the court rules against the EFSF, Germany would have to drop out as a guarantor. This would reduce its lending capability," he said.
Willem Buiter, chief economist at Citigroup, is blunter. He said an adverse ruling would have "catastrophic implications" and increase the likelihood of sovereign defaults because the credibility of the fund depends on German backing. He called this a small tail risk given that the German judges are "intensely political" and unlikely to be bound by the letter of the law in such a case.
The EFSF is a stand-alone facility in Luxembourg outside the EU structure, headed by a retired EU official Klaus Regling. The European Commission and the European Investment Bank already have AAA ratings, but they are different animals. The curious feature about the EFSF is that as more countries draw on the fund they cease to be contributors. A reduced group of creditors must lend to an expanding group of debtors. This is a very unstable arrangement.
S&P analysed combined rescues for up to three countries. This implicitly assumes that a crisis involving triple bail-outs for Ireland, Portugal, and Greece (again) could be contained without spilling over into Spain. The exposure of Spanish banks to the Portugal is equal to 6pc of Spain’s GDP. The fates of the two countries are deeply intertwined. The EFSF structure also assumes that Italy can remain rock-solid as a full contributor in such a crisis. These are thorny questions. "In the end, the ECB is going to have to continue providing unlimited liquidity to the banks of these countries to be sure that this is never put to the test," said one German banker.
Recession Ruled Dead, but U.S. Still Haunted
by Sara Murray, Michael S. Derby and Michael R. Crittenden - Wall Street Journal
The U.S. recession that wiped out 7.3 million jobs, cut 4.1% from economic output and cost Americans 21% of their net worth ended in June 2009, marking the longest and deepest slump since the Great Depression. But even as the end to the recession was officially called, a new report highlighted the weaknesses still facing the U.S. economy. The country's economy has struggled to find its feet since that low point and still faces stubbornly high unemployment and slow growth.
The recession ended 18 months after the economy began sliding into a downturn in December 2007, according to the National Bureau of Economic Research's Business Cycle Dating Committee, a group of academic economists that determines the widely accepted benchmarks for U.S. recessions. The next-longest postwar slumps were those of the early 1970s and early 1980s, which both lasted 16 months.
The pronouncement comes as the economy shows signs it has avoided a slide back into another swoon. Stock-market investors have taken heart; the Dow Jones Industrial Average has rallied more than 7% this month, thanks to better-than-expected data on a number of fronts, including housing, manufacturing and unemployment. It rose 1.4% Monday to its highest close in four months.
The market's gains come after a bleak August, in which the Dow fell 4.3% as investors fretted that the economy would dip back into recession. Still, the National Bureau of Economic Research warned that its call of an end to the recession didn't mean it had concluded "that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity."
The group said its determination did mean that "any future downturn of the economy would be a new recession and not a continuation of the recession that began in December 2007." While there are several short-hand definitions used by market participants to mark turns in the business cycle, the economists' group relies on a more complex formula. It frequently waits some time before making its determinations, as it seeks to use the most definitive data available.
Separately, the Organization for Economic Cooperation and Development said in a report Monday that still-high U.S. unemployment is unlikely to return to precrisis levels for at least three years, one of a number of challenges Washington policy makers face as they seek to encourage a sluggish recovery. The OECD said the recent economic downturn could result in a permanently higher level of unemployment. While previous U.S. recessions didn't cause any long-term structural damage to the economy, "it is possible this recession will trigger these effects," it said.
"It could be early 2013, at best, before the [unemployment] rate returns to its prerecession level," the report said. The report said U.S. policy makers should continue efforts to support the job market. It said the Obama administration's stimulus efforts and the Federal Reserve's efforts to keep credit flowing "successfully turned the economy around." Still, it said, domestic U.S. demand is likely to be dampened for the next few years as consumers save to replace net worth lost during the downturn and to bring down their debt levels.
In addition to analyzing the U.S. efforts to respond to the recession, the OECD report also weighed in on Washington's high federal deficit. The Obama administration's plan to balance the federal budget by 2015 "is ambitious, but appropriately gradual and should therefore be implemented in full," the report said. While that proposal is a start, the OECD said, policy makers are likely to have to take additional steps in the second half of the decade to continue to improve the nation's fiscal condition. Reining in spending alone is unlikely to be enough, the report warned. "Barring cuts in entitlements and defense spending, which are currently not on the policy agenda, taxes will likely have to increase," the report said.
The OECD singled out the government's Medicare and Medicaid health-care programs for the elderly, poor and others as among in which lawmakers would need to restrain an expected growth in spending. At the same time, it predicted that the Obama administration's new health-care law would result in a long-term decrease in public-health spending. Additionally, the report noted that U.S. tax levels are low compared with other countries, and that modest increases, while politically unpopular, "would still keep the overall tax burden at a relatively moderate level and not impose excessive costs."
Notably, the report suggested that calls by some politicians to immediately take action to reduce the deficit might be misguided. "The course of the recovery is still uncertain, arguing against a sharp and immediate deficit reduction," the OECD said.
Zombie Buildings Shadow Spain's Economic Future
by Paulo Prada - Wall Street Journal
Torre Lugano, Spain's tallest residential tower, attracted buyers from here and abroad with glossy brochures promising a luxury building with a glass-walled elevator and sweeping views of this Mediterranean resort's turquoise waters. The reality is very different. The garage floods, windows are drafty and backed-up toilets flood apartments with sewage. The glass elevator never materialized. Residents, some recently forced to shower in a communal rest room because the plumbing on their floors failed, are suing the developers for €28.2 million ($36.4 million), citing "construction defects."
Torre Lugano is a 420-foot-tall example of the gap between Spain's recent dreams of economic glory and its grim new reality. Some 1.5 million unfinished, unsold or unwanted residential units stand scattered across the country, products of a still-deflating housing bubble that threatens to undermine Spain's broader economy for years to come. It is the hangover after an epic fiesta, a period Spaniards now refer to as "cuando pensábamos que éramos ricos"—"when we thought we were rich." Once hailed as early proof of the success of the euro, Europe's single currency, Spain's low interest rates from the mid-1990s and its proximity to richer neighbors ushered in a decade-long period of prosperity.
Now, as a recovery remains elusive across the continent, Spain's ability to revive growth is considered a vital test of the future stability of the currency and Europe's economic health. With a $1.3 trillion economy, Spain is the fourth-biggest economy using the euro, accounting for about 11% of the zone's overall output. Europe's other teetering economies, Greece, Ireland and Portugal, together account for roughly 6%.
Uncertainty over Spain's capacity to recover has increased the pressure on Spanish stocks and bonds. Prime Minister José Luis Rodriguez Zapatero, having already slashed billions of euros from the national budget this year, has said he will unveil an even tighter 2011 budget in the coming weeks. Even the king and queen are feeling the pinch: This week, officials at Spain's Royal Palace announced that the royal family, whose income depends on appropriations from the government, were expecting a slimmer allowance next year.
As international markets have turned away from the country, Spanish banks have had to rely on the European Central Bank to keep vital credit flowing through the economy. Moody's Investors Service, the only one of the three major ratings firms not yet to have downgraded Spain's sovereign debt, in August said it was still considering a ratings cut.
Investors believe banks need to be more transparent about the number of bad loans and other assets they have on their books. Instead of disclosing troubled credit, many Spanish lenders have chosen to refinance loans that could still prove faulty and to report foreclosed or unsold homes as assets, often without posting their drop in market value. Even after many banks passed this summer's government-imposed "stress tests," economists believe such assets still pose a danger. One risk, says Luis Garicano, an economist at the London School of Economics, is that Spanish lenders could follow in the footsteps of Japan's so-called zombie banks, "holding on to capital in order to cover their losses."
For years after the collapse of Japan's economic boom in the early 1990s, the country's banks held on to troubled properties and other non-performing assets as they lost value, in hopes that the market would recover. That kept capital tied up in a languishing sector, preventing lenders from financing more vital sectors of the economy. By 2002, 8.4% of all loans in Japan were non-performing, according to Japanese government figures.
In Spain, that figure hit 5.4% in June, up from less than 1% just three years ago. The Bank of Spain, the country's central bank, in a report earlier this year estimated that as many as €165 billion in loans, or about 37% of all Spanish credit with exposure to construction and real estate, could ultimately prove to be "problematic."
In recent months, the Bank of Spain adopted measures that require lenders to allocate more of their reserves, and to do so more quickly, for bad loans and real-estate assets lingering on their books. Regulators also spurred a rapid round of consolidation among savings banks, or cajas, regional credit institutions that have borne the brunt of the housing crisis. With the backing of a government fund to help refinance the sector, officials hope the merged cajas can better digest the losses and emerge after the crisis as stronger, more competitive lenders.
Any recovery will take time. Economists say in a healthy market it would take at least three years to sell all of Spain's unsold homes that were built during the boom. That's more than three times as long as new supply was expected to sit undigested during the worst of the U.S. housing glut. It will take longer still for the broader Spanish economy to perk up. Saddled with 20% unemployment and sharp cutbacks from a newly-austere Spanish government, consumers are unlikely to take out their pocketbooks anytime soon.
The decade through 2007 was a heady one for Spain. Flush with foreign investment and cheap credit that came with the arrival of the euro, it saw ambitious projects sprout everywhere. This was in stark contrast to the conservative approach to development that long held sway here. Spain until recently was so frugal and had so little purchasing power that Spaniards referred to "Europe" as the continent beyond the Pyrenees.
Now, many Spaniards are bemoaning the folly of it all. In the town of Ciudad Real, a newly built airport goes largely unused and is saddled with millions of euros in debt. In Zaragoza, a mid-sized city between Madrid and Barcelona, cutting-edge fairgrounds, intended for use as a business park, sit empty two years after a world's fair. The Benidorm tower, in the eastern region of Valencia, rises above a swath of coastline that over the past decade was transformed from a sunny strip of citrus groves and farmland into one of the most speculative housing markets on the planet. Spaniards enjoying easy mortgages were joined by Britons, Germans and other buyers from colder climes.
Construction along the Valencian coast outpaced the building boom elsewhere across Spain, and accounted for more than 12% of the region's economy in 2008—more than twice what it had a decade earlier. The industry created so many jobs that in 2006, near the peak of the boom, unemployment in the region, now a staggering 24%, dropped below the national average—a triumph in an area with big seasonal job swings. The demand for labor was such that foremen were known to travel from job site to job site at the end of the day, poaching entire crews from rivals by offering an additional euro per hour in wages.
The race to get in on the boom led some residents of Valencia to cash in. "How do you tell someone to keep their orange grove when a developer promises riches overnight?" asks Jorge Alarte, the leader of the region's Socialist party. Haste sometimes led to shoddy construction, as developers drummed up deals and builders, frequently relying on subcontractors, rushed from one project to another. Nowadays, scenic hillsides and beachfront vistas sit occupied by empty scaffolding, unfinished cinder-block frames and garbage heaps from work suspended months ago.
Developers began marketing Torre Lugano in 2003. Offering commanding views of Benidorm's two crescent beaches, the tower's apartments ranged in price from €180,000 to €710,000 and were to have access to tennis courts, a pool, a playground and a gym. The project is a joint venture between Acciona SA, one of Spain's biggest builders, and Caja de Ahorros de Valencia, Castellón y Alicante, or Bancaja, the biggest lender in Valencia. Bancaja is now in the midst of a seven-way merger with other regional savings banks amid the reordering of the troubled sector. Spokespeople for Acciona and Bancaja declined to comment on the dispute at Torre Lugano.
Problems started as early as 2006, when developers informed buyers that builders wouldn't meet the initial deadline for completion, mostly because the construction boom had led to a shortage of labor and materials. To encourage some to stick with the purchase, developers offered kitchen furnishings on the house, according to residents. While some buyers backed out, some waited. "We were still excited and were happy to stick it out," says Alberto Sáenz, a bar owner and father of two young boys.
Tired of his hectic lifestyle in the northern city of Bilbao, Mr. Sáenz and his family had moved to Benidorm just as Bancaja was beginning to promote Torre Lugano. Though their move was driven by a desire to take lower-stress, lower-paying jobs, they were also lured by the building and were confident they could afford the €200,000 mortgage with additional income they earn by renting out the bar and a home they own back in Bilbao.
"This really was like a dream for us," says Mr. Sáenz, recalling a verdant path that would be carved from the adjacent playground into a hillside behind it. The long path was never actually built, though it remains visible in a mockup of the project still on display in a Bancaja window on Avenida del Mediterráneo, a busy thoroughfare in central Benidorm.
During the final year of the building's construction, the global downturn began to hit Spain hard. Some of the buyers who had agreed to wait on the building decided to drop out. More than a third of the tower went unsold. That's when residents say they noticed builders beginning to cut corners. Instead of aluminum railings and fixtures in outdoor areas, where the salt air and moisture corrodes other metals quickly, builders fastened cheaper iron, now rusted. A polished facade that was supposed to look like marble is instead rough concrete painted white.
When residents finally moved in, they say, further defects became apparent. A faulty central fire alarm is now disconnected, having triggered itself erroneously dozens of times in a single day. A retaining wall and staircase alongside the swimming pool is roped off because part of the wall has buckled and recently began leaking water. Some apartments go days without water because of defective pumps. Hollow plaster walls lack the sound-proofing that was advertised, allowing residents to hear conversations, arguments and creaking beds in neighboring apartments.
"You could understand an error or two in any building, but dozens?" asks Mr. Sáenz. The residents' association says it has spent €900,000 over the past two years making repairs to common areas and recently approved a budget that includes €400,000 more for repairs and costs associated with the lawsuit. They are suing the developers, Acciona and Bancaja, and others involved in the project, in a regional court in Valencia for "construction defects" of €28.2 million. They say that's the difference in value between what they allege the building would have been worth had it been built as promised, and what it is now appraised at.
After more than 50 years of work, Vicente Villalba took his profits from the sale of a catering business and in 2004 bought a Torre Lugano apartment. He now hangs his clothes on children's hangers so that they fit in the narrow closets that were installed instead of the full-sized wardrobes advertised. Recently, he toured a utility room that was originally supposed to be a clubhouse. He pointed in disbelief at a jerry-rigged joint between a large water pipe and a much smaller one. The second pipe, placed sloppily above electricity cables in a wiring tray, recently succumbed to the pressure from the bigger one, shorting out the circuits below and leaving entire floors without electricity. "It's a giant rip-off," says Mr. Villalba of the tower. "It was all too good to be true."
Long-term increase in US unemployment 'possible', warns OECD
by Richard Blackden - Telegraph
Millions of Americans risk falling out of the job market forever, the Organisation for Economic Co-operation and Development (OECD) has warned, as it cautioned a full recovery from recession will take years. The recession has left the US with a long-term unemployment rate – a measure of those without work for more than six months – of 4.5pc, almost double that of the 1980s and 1990s downturns. "Previous US recessions have exhibited no long-term damage to the economy or long-term increase in unemployment, but it is possible this recession will trigger these effects," the OECD said in its first survey of the world's biggest economy since late 2008.
The wide-ranging analysis urged the US to consider a Value Added Tax to help narrow its deficit, to radically reshape its housing policy and for the Federal Reserve to begin phasing out the stimulus measures that have cushioned the economy. However, the most urgent priority, the report argued, is for President Barack Obama to marshal support across the political spectrum for measures including tax incentives for companies to hire new staff to help ease the growing crisis in the labour market.
However, the failure of the now slowing recovery to drive unemployment much below 10pc has split the parties in the run-up to the Congressional elections in November, making it far less likely Republicans will back any new measures to cut jobless numbers. Growing support for the Republican's Tea Party faction, which is sceptical of any new stimulus, also adds to difficulties faced by the Obama administration. That political paralysis in Washington is putting more pressure on the Fed to cement the recovery, and its interest rate setting Open Market Committee gives its latest decision on Tuesday. The Fed is expected to resist investors' calls, at least for now, that a new policy blitz is needed.
The OECD acknowledged that rates should remain at the current 0pc to 0.25pc range, but insisted the economy must begin to be weaned off its life support. "Since the movement of interest rates from extremely expansionary levels to neutral levels and the gradual shrinkage of the Fed's balance sheet will take some time, initial increases need to begin well before the economy once again approaches full capacity," the report said.
While much of the blame for the crisis has been laid at the door of reckless bankers, the OECD argued that fundamental reform of housing legislation is needed. Tax relief on mortgages must be abolished and the taxpayers' subsidy provided through government-backed mortgage lenders Fannie Mae and Freddie Mac must end. "These moves can lesson the likelihood and severity of future housing market shocks," the OECD said. Separately, the National Bureau of Economic Research, the official arbiter of the length of business cycles in the US, said that the recession ended in June 2009, making it the longest since the Second World War.
GMAC Mortgage Suspends Foreclosures in 23 States
by David Streitfeld - New York Times
GMAC Mortgage, one of the country’s largest and most troubled home lenders, said on Monday that it was imposing a moratorium on many of its foreclosures as it tried to ensure they were done correctly. The lender, which specialized in subprime loans during the boom, when it was owned by General Motors, declined in an e-mail to specify how many loans would be affected or the “potential issue” it had identified with them. GMAC said the suspension might be a few weeks or might last until the end of the year.
States where the moratorium is being carried out include New York, Connecticut, New Jersey, Illinois, Florida and 18 others, mostly on the East Coast and in the Midwest. All of the affected states are so-called judicial foreclosure states, where courts control the interactions of defaulting homeowners and their lenders. Since the real estate collapse began, lawyers for homeowners have sparred with lenders in those states. The lawyers say that in many cases, the lenders are not in possession of the original promissory note, which is necessary for a foreclosure.
GMAC, which has been the recipient of billions of dollars of government aid, declined to provide any details or answer questions, but its actions suggest that it is concerned about potential liability in evicting families and selling houses to which it does not have clear title. The lender said it was also reviewing completed foreclosures where the same unnamed procedure might have been used.
Matthew Weidner, a real estate lawyer in St. Petersburg, Fla., said he interpreted the lender’s actions as saying, “We have real liability here.” Mr. Weidner said he recently received notices from the opposing counsel in two GMAC foreclosure cases that it was withdrawing an affidavit. In both cases, the document was signed by a GMAC executive who said in a deposition last year that he had routinely signed thousands of affidavits without verifying the mortgage holder. “The Florida rules of civil procedure are explicit,” Mr. Weidner said. “If you enter an affidavit, it must be based on personal knowledge.”
The law firm seeking to withdraw the affidavits is Florida Default Law Group, which is based in Tampa. Ronald R. Wolfe, a vice president at the firm, did not return calls. The firm is under investigation by the State of Florida, according to the attorney general’s Web site. Real estate agents who work with GMAC to sell foreclosed properties were told to halt their activities late last week. The moratorium was first reported by Bloomberg News on Monday. Bloomberg said it had obtained a company memorandum dated Friday in which GMAC Mortgage instructed brokers to immediately stop evictions, cash-for-key transactions and sales.
Nerissa Spannos, a Fort Lauderdale agent, said GMAC represents about half of her business — 15 houses at the moment in various stages of foreclosure. “It’s all coming to a halt,” she said. “I have so many nice listings and now I can’t sell them.” The lender’s action, she said, was unprecedented in her experience. “Every once in a while you get a message saying, ‘Take this house off the market. We have to re-foreclose.’ But this is so much bigger,” she said.
by Al Lewis - Wall Street Journal
There is no Santa Claus. The next best thing is Wal-Mart. And Wal-Mart says we're all getting underwear for Christmas. OK, so maybe some children will still receive their annual allotments of cheap electronic games and plastic toys. "But for all you adults out there, I think you should plan on socks and underwear for Christmas," said Bill Simon, CEO of Wal-Mart's U.S. business, at a Goldman Sachs conference last week. "Because that's going to be what you are going to get -- at least from me."
He was kidding. But he was not all that funny. "The Wal-Mart customer is a bit of a microcosm of the U.S. economy," he explained at the conference. "Our customers are focused on their savings, and they need us now more than they ever have. Unemployment, we all know, remains mid-9s [9%] and doesn't appear to be going anywhere quickly. Gas prices are high...." And the poorer America becomes, the more it needs Wal-Mart. "It is our responsibility to figure out how to sell in that environment," Mr. Simon said. "And to figure out how to deal with...an ever-increasing amount of transactions being paid for with government assistance."
The day after Mr. Simon made this presentation, the U.S. Census Bureau released new data showing more Americans living in poverty than when President Lyndon Johnson launched his historic war on poverty. A record 43.6 million people lived in poverty in 2009, up from 39.8 million in 2008, the Census Bureau reported. This is the highest number in the 51 years for which poverty estimates are available.
Much of this is because of a larger population. Despite recent spikes, the poverty rate remains eight percentage points lower than it was in 1959. But for 2009, the poverty rate hit 14.3%, the highest since 1994, the Census Bureau reported. And that's one out of every seven Americans. What's poverty? In 2009, the weighted average threshold for a family of four was $21,954. Median U.S. household income, meanwhile, remained essentially unchanged at $49,777. Perhaps underwear for Christmas isn't such a bad idea.
Former Federal Reserve Chairman Alan Greenspan once said he viewed underwear sales as an economic indicator. Cost-cutting consumers will wear their old undies longer, the theory goes.
Maybe a year-end, tighty-whitey rally could snap a little prosperity into our sagging economy.
"You need not go further than one of our stores on midnight at the end of the month," Mr. Simon said. "It's real interesting to watch. About 11 p.m., customers start to come in and shop, fill their grocery basket with basic items, baby formula, milk, bread, eggs, and continue to shop and mill about the store until midnight, when...government electronic benefits cards get activated and then the checkout starts. "The only reason somebody gets out in the middle of the night and buys baby formula is that they need it," Mr. Simon said. "We are open 24 hours.... If you are there at midnight, you are there for a reason."
And I bet it ain't Christmas shopping for underwear.